The Power of Outsourcing Vendor Risk Management

2017 was a year of change in the financial services industry. This includes the OCC proposed Fintech Charter and a changing of the guard within the rank and file of the Consumer Financial Protection Bureau (CFPB) to record the number of consumers impacted by lax internal controls of non-public personal information data and information security, but it doesn’t end there.

Meeting the Demand for Quicker, Faster and Better

In an industry which is striving towards a digital driven experience, there’s an increasing emphasis on quicker, faster and better goods and services for the consumer. In rate sensitive environments, consumers may be quick to follow the lower rates with little regard to brand loyalty. So, operational efficiencies and ease of use become pillars of a sound operation and can make the difference between the “haves” and “have nots” in terms of market share.

The needs of the business can become mind boggling when leadership takes a moment to review the overall operation. The well-worn adage ABC – Always Be Closing – rings true in the industry, and to do so, management must have the dedicated resources to meet the goal.  

This leads to reviewing staffing levels and retaining the right expertise to meet the specific business need, all while working within a budget which balances current volume to projected business needs for the future. In fact, it’s not uncommon for competitors to offer large sign-on bonuses to attract staff. The headache and challenge of training a transitional workforce is real and can be at your expense.

Regulatory Risk Framework Changes Post 2007 Impacting 2018

Since the financial crisis of 2007, the industry has adapted to the new framework of regulatory risk. Tighter margins and admirable volumes have been on the rise with competitive rates. The industry has also seen its fair share of regulatory compliance violations with the introduction of the CFPB oversight task forces, also known as the examiner.

Volume predictions for 2018 will vary somewhat, but chatter around mergers and acquisitions activity, brand exits and the chase of the unicorn experience should be a constant reminder that competition and boosting the bottom line for your organization are key factors to be aware of when running a successful operation. 

Why Is Vendor Management Oversight Now Recognized as a Unique Discipline Which Can Be Successfully Outsourced?

There’s a few reasons why vendor management oversight can be successfully outsourced:

• You can manage risk for less.
• With the average cost of a new employee in any given role estimated to be at a factor of 4 times base salary, it makes for a logical argument that outsourcing a process or function when and as you need it may also provide financial savings. Too often in vendor management, the focus is on, what will this cost me?  What we are seeing more and more at Venminder is the reoccurring question, what will this service SAVE my organization?
• In the financial services industry, front end fulfilment services have often been outsourced to leverage increased volumes either due to sheer success of the brand or seasonal market rate environments.
• Areas such as quality control, IT consultants or collateral review services have enhanced the internal operation where either a limited talent pool or higher cost of living prohibits staffing up on a full-time basis.
• The adoption of outsourcing can be viewed as forward thinking by those who recognize the strategic advantage of leveraging a resource to continue to meet Service Level Agreement (SLA) turn time business needs.
• The thought leaders, such as CEOs, CAOs and COOs, invariably look at a line of business or regulatory compliance requirement as a line item cost and not a profit center. The adoption of outsourcing a function which leverages specific financial services expertise can and has been proven to reduce those cost items considerably. In 2017, Venminder saw a significant shift in the number of services where executives outsourced a significant portion of the vendor management oversight role. 

3 Common Outsourcing Reasons from 2017

1. Outsourcing may be of interest to financial organizations who are located in higher cost of living, high tax rate states. The cost of labor, for example, in Orange County, California is considerably higher than Elizabethtown, KY, yet the expertise offered is second to none but at a reduced rate. By leveraging the geographic differences, savings can be made without sacrificing quality. While offshoring a service usually has a lower cost of entry, the results in expertise, quality and turnaround time may be perceived as lacking. Leveraging the onshore geographic model can provide immediate savings while not impacting the desired results.
2. Time and availability. Outsourcing to a third party risk vendor also provides the advantage of not having to wear many hats, or becoming stuck in the weeds with the day to day business operations. Third party risk oversight often has the danger of becoming too close to vendor partnerships. Outsourcing some of the heavy lifting makes sense for a true impartial review of a vendor’s controls and policies which ultimately informs the organization of any perceived risk issues, which may put the organization in harm’s way. Paying for the analysis and review when you need it for an executive board review or regulator/state examiner review has proved to be a much more efficient process than relying on an internal resource who is busy juggling multiple business demands.
3. Knowledge of the industries you serve. Third party risk is a varied discipline and covers many areas of concern. Financial, reputation, operational and credit risk all require expertise. Any third party vendor offering such oversight functions is typically working in these areas on an everyday basis. Having expertise at the loan and transaction service level is oftentimes a differentiator when reviewing a third party risk solution.

Outsourcing Certain Third Party Tasks Can Be Powerful for Your Organization

Outsourcing a function which requires a specific set of qualifications and expertise can provide immediate advantages in terms of both cost savings and an increased quality and uniformity in your third party assessments. Given the increasing cost of doing business with razor sharp margins, outsourcing third party risk is gaining popularity. It makes good financial sense.

Outsourcing some of your due diligence tasks can help reduce your workload and save you money in the long run. Check out these due diligence samples.